Pep Boys 2012 Annual Report Download - page 81

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended February 2, 2013, January 28, 2012 and January 29, 2011
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
MERCHANDISE INVENTORIES Merchandise inventories are valued at the lower of cost or
market. Cost is determined by using the last-in, first-out (LIFO) method. If the first-in, first-out (FIFO)
method of costing inventory had been used by the Company, inventory would have been $565.8 million
and $536.4 million as of February 2, 2013 and January 28, 2012, respectively. During fiscal 2012, 2011
and 2010, the effect of LIFO layer liquidations on gross profit was immaterial.
The Company’s inventory, consisting primarily of automotive tires, parts, and accessories, is used
on vehicles typically having long lives. Because of this, and combined with the Company’s historical
experience of returning excess inventory to the Company’s vendors for full credit, the risk of
obsolescence is minimal. The Company establishes a reserve for excess inventory for instances where
less than full credit will be received for such returns or where the Company anticipates items will be
sold at retail prices that are less than recorded costs. The reserve is based on management’s judgment,
including estimates and assumptions regarding marketability of products, the market value of inventory
to be sold in future periods and on historical experiences where the Company received less than full
credit from vendors for product returns. The Company also provides for estimated inventory shrinkage
based upon historical levels and the results of its cycle counting program. The Company’s inventory
adjustments for these matters were approximately $4.6 million at February 2, 2013 and January 28,
2012, respectively. In future periods the company may be exposed to material losses should the
company’s vendors alter their policy with regard to accepting excess inventory returns.
PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation and
amortization are computed using the straight-line method over the following estimated useful lives:
building and improvements, 5 to 40 years, and furniture, fixtures and equipment, 3 to 10 years.
Maintenance and repairs are charged to expense as incurred. Upon retirement or sale, the cost and
accumulated depreciation are eliminated and the gain or loss, if any, is included in the determination
of net income. Property and equipment information follows:
February 2, January 28,
(dollar amounts in thousands) 2013 2012
Land ...................................... $ 203,386 $ 204,023
Buildings and improvements ...................... 885,389 875,999
Furniture, fixtures and equipment .................. 728,122 723,938
Construction in progress ........................ 3,282 3,279
Accumulated depreciation and amortization .......... (1,162,909) (1,110,900)
Property and equipment—net ..................... $ 657,270 $ 696,339
GOODWILL At fiscal year end 2012, the Company had six reporting units, of which three
included goodwill (related to prior acquisitions by the Company). The Company tests the recorded
amount of goodwill for recovery on an annual basis in the fourth quarter of each fiscal year.
Impairment reviews may also be triggered by any significant events or changes in circumstances
affecting the Company’s business.
Goodwill impairment testing consists of a two-step process, if necessary. The first step is to
compare the fair value of a reporting unit with its carrying amount. If the carrying amount of a
reporting unit exceeds its fair value, the second step of the impairment test must be performed in order
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